Toys R Us examines bankruptcy options

By Anna Nicolaou, James Fontanella-Khan and Eric Platt in New York – Financial Times

Sep 18, 2017, 9:45pm EDT

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Toys R Us, the private equity-owned US toy retail chain, is preparing to file for bankruptcy within days, according to people familiar with the matter.

The New Jersey-based company is wrestling with $400m of secured and unsecured debt maturing in May and October 2018, which it hired law firm Kirkland & Ellis to help with restructuring, these people said.

The filing would be the latest in a grim year for traditional retailers ravaged by the rising popularity of ecommerce - particularly among companies who took on large debts in the years leading up to the financial crisis.

Toys R Us, founded during the post-World War II baby boom of the 1950s, grew into the dominant American toy store but has struggled to keep up with the shift to online and stiff competition from big box retailers such as Walmart. Bain Capital, KKR, and Vornado Realty Trust took Toys R Us private in 2005 in a $6.6bn leveraged buyout.

Sales at Toys R Us have slipped on a same-stores basis for three consecutive quarters, with the company in June reporting a quarterly net loss of $164m on sales of $2.2bn.

Vendors have become cautious, in turn, limiting shipments of inventory to Toys R Us, according to people familiar with the matter. The difficulties have beset the group in the run-up to the all-important holiday shopping season, during which Toys R Us makes about 40 per cent of its more than $11bn in annual sales.

The toy industry at large has had a slow year, as a series of toy lines were linked to Hollywood films that failed to meet box office goals, while fads such as fidget spinners dominated sales. Lego this month reported its first sales drop in 13 years, while Mattel has brought in a new chief executive to turnround sales.

The grim year for retailers has led to an uptick in bankruptcies this year. Last week Aerosoles, the women's footwear company, filed for bankruptcy, adding to the 24 US retailers who had filed for Chapter 11 protection this year, compared to 18 for all of 2016, according to data from S&P Global Market Intelligence.

Bonds sold by Toys R Us have slid rapidly as news of a possible bankruptcy filing were reported. Debt that matures in October 2018 declined to 18 cents on the dollar on Monday afternoon, more than halving in value from the close of trading on Friday, according to Finra. By contrast, the bonds were marked at roughly 97 cents on the dollar at the start of September.

The company was hit with twin downgrades from rating agencies S&P Global and Fitch on Monday. Fitch warned that the evolution of the toy industry would "make it attractive" for competitors to continue to gain market share from Toys R Us, and subsequently lowered its rating on the company deeper into distress territory.

Monica Aggarwal, an analyst with Fitch, said that the company's "capital structure is unsustainable in the long term".

Kirkland declined to comment. Toys R Us did not respond to requests for comment.